RBI may lower interest rates to only 25 bps and see the impact in terms of transmission: Madan Sabnavis, CARE Ratings

Our own house view is that there will be no change in interest rates. If at all there is going to be change in interest rates, it is going to be by 25 bpsET Now | Updated: September 29, 2015, 07:20 IST

ET Now: While brokerages are saying that there is a limited scope of a 50 bps rate cut this time around, what chances would you ascribe to the RBI being aggressive given that they have got some levy with the Fed pausing on rates as of now?

Madan Sabnavis: As I said earlier, our own house view is that there will be no change in interest rates. If at all there is going to be change in interest rates, it is going to be by 25 bps. That is the policy which the RBI has followed. What the RBI is really doing is that they are lowering rates by 25 bps and seeing what is going to be the impact in terms of the transmission, where the banks are really following suit, and whether the interest rate change is really making a difference.

Most of the investment which we have seen and the economy is coming more from the government spending, rather than from the private sector which is still following a wait and watch policy. So in this kind of a scenario I do not think there will be an aggressive cut of 50 bps if at all it happens it will be only 25 bps cut.

ET Now: What are your own thoughts of growth going forward, if one takes all the factor the production as well as the way global growth scenario our own exports and our old fiscal position, given that commodity prices have come down, if one were to sum up all of them up 12 months down the line what kind of numbers can we expect on GDP in your view?

Madan Sabnavis: See now we are looking at a GDP growth rate of 7.8%, that is a view which we took at the beginning of the year. As of now based on all of the data which is available there is a strong downward bias given that the agricultural output may not be as good as what it was earlier.

The only positive side is that there will be some improvement in the government investment which should hopefully get reflected in the GDP growth numbers and as far as industry is concerned, we still see surplus capacity in almost all the sectors so investment coming from the corporate sector is going to be very much limited.

We are not seeing too much of spending taking place either in terms of households or in terms of corporate, a limited extent as far as government is concerned. If we are looking in terms of exports there has definitely been a negative growth in exports during the course of the year and I do not think this is going to get reversed.

All the advantages which we had of global commodity prices coming down especially of crude oil also gets reflected in terms of a slower growth in exports.

Since we have not seen the world economy improve in a significant manner, we have not seen any turnaround in growth in exports. So in all the situation I would say that our GDP growth looks just about stable from last year, last year we had 7.3% may be this year we could end up around 7.5-7.6% and this new calculation of GDP could be making most of our estimates move around by say 0.2 or 0.3%.

This way that way but a ground reality is that it is not going to be a major turnaround. See whatever we are going to see is going to be more of maintenance is what was observed last year with a gradual movement in upward direction.

ET Now: As an economist, what are your observations of the ongoing event of Prime Minister Modi making a road show in United States once again meeting almost all the top CEOs whether it is the financial services space or the IT space and a lot of money is already being committed, do you think this has a potential to lead to higher FDIs flows into our country and if yes, by when actually we actually start witnessing some flows coming?

Madan Sabnavis: We need to distinguish between two parts of it. One is in terms of what the prime minister is doing, which is very commendable and something very pragmatic, because we need to also talk to all the foreign investors and tell them about how intact the India growth story is, how India is a better economy, better placed economy than the other emerging markets. So that is something that the jobs which Mr Modi is doing which we really need to commend for him for that.

But the second part is – how much of this talk really gets converted to investments which are being committed. Here also we see that wherever he has gone, we have seen a lot of investment being committed.

The third part of the story is how much of this investment really comes in. I would just take you back to the domestic investment scenarios where almost every state government has certain kind of these functions where they try and get in foreign investment, they try to get domestic investment and we see a lot of money being committed in that particular week.

But finally if we see how much of this money has really got and translated into physical investment, it has been very-very minimal, seen by the fact that our gross domestic capital formation is actually being falling down.

I will be a bit more cautious about what is going to be the final impact, so one thing about what the government can do in terms of talking to the investors, what the government can do in terms of creating and enabling environment but the overall conditions need to improve significantly before people really commit the money.

That is why we should not really think that by these kind of meetings which are held by the prime minister that foreign direct investment coming to India is going to jump say from $30 million to $50 million that is going to happen over a period of time, and if the domestic economy on its own needs to show a lot of resilience, lot of robustness before we see investment flowing in any big way.